This research compares partial equilibrium and statistical time-series approaches to hedging. The finance literature stresses the former approach, while the applied economics literature has focused on the latter. We compare the out-of-sample hedging effectiveness of the two approaches when hedging commodity price risk using futures contracts. For various methods of parameter estimation and inference, we find that the partial equilibrium models cannot out-perform a vector error-correction model with a GARCH error structure. The partial equilibrium models unpalatable assumption of deterministically evolving futures volatility seems to impede their hedging effectiveness, even when potentially foresighted option-implied volatility term structures are employed.
Download Info
To download:
If you experience problems downloading a file, check if you have the
proper application to
view it first. Information about this may be contained
in the File-Format links below. In case of further problems read
the IDEAS help
page. Note that these files are not on the IDEAS
site. Please be patient as the files may be large.
Publisher Info
Paper provided by University of Maryland, Department of Agricultural and Resource Economics in its series Working Papers with number
28580.
References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.: